Faced with weakening coal prices and the risk of paying higher royalties next year, small mining companies across the archipelago may have to shut down their operations if the government decides to impose a tax on coal exports next year.

Thamrin Sihite, the director general of coal and minerals at the Energy and Mineral Resources Ministry, said in Jakarta on Wednesday that the new fiscal measure and high royalties imposed might result in closures of small scale miners.

But, he said that these measures were needed in order to prevent overexploitation, which could lead to the escalation of environmental damage. “As a matter of fact we don’t have abundant coal reserves. In the long term, we must avoid widespread exploitation by managing exports,” he said.

The export tax will be introduced next year, during which the government also plans to increase royalties paid by holders of IUP mining permits issued by local governments, mostly consisting of small scale producers, which are often blamed for their lack of effort in protecting the environment in their mining areas. In addition to preventing over-exploitation of coal resources, the export tax will also complement the domestic market obligation (DMO) ruling, which was imposed to ensure sufficient supply for the local market. Under the DMO, coal producers must sell a certain portion of their production to local buyers.

The Energy and Mineral Resources Ministry’s head of legal and public relations, Susyanto, said the implementation of a tax on coal exports would be an instrument that would force producers to “think twice” before exporting their coal. “The DMO policy is merely a suggestion while the export tax would tightly regulate coal exports. In addition to controlling the exports, we will also have the chance to monitor coal miners to ensure that they operate safely,” he said.

The planned system would likely burden coal producers in the nation with coal prices continuing to decline and force some miners, in Sumatra for example, to exit the business.

In addition to the export tax, the government also proposed increasing royalties for coal miners holding IUP permits from 5 to 7 percent of net sales to 13.5 percent. IUP permits are issued by local governments to small scale companies.

Komaidi Notonegro, an executive with the Jakarta-based ReforMiner Institute, an energy sector thinktank, said the fiscal measure would be a positive step toward putting an end to small mining companies, whose operations often cause destruction to the environment.

“This can be seen as a positive outcome for the country’s energy security in the future,” he said.

Meanwhile, Bob Kamandanu, an executive from the Indonesian Coal Mining Association (ICMA) said that the organization would push the government to halt the plan to implement a tax on coal exports.

“I think applying an export tax should be the last resort since the timing is already rough for the miners at the moment,” he said.

Separately, Prakash Sharma, a senior coal analyst with Wood Mackenzie Group, a global mining think tank, said that while the government’s plan to implement a tax on coal exports would be ill-timed. “The producers are already suffering from weak coal prices. Indonesian producers are also going to be adversely impacted due to increases in royalty rates next year,” Singapore-based Sharma said in an email sent to The Jakarta Post.